CBO Argues for an End to Federal Cuts

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The Congressional Budget Office (CBO) reports that it is this simple: the cancellation of the automatic spending reductions specified by the Budget Control Act of 2011, or sequestration as it is commonly called, would mean:

Those changes would increase the level of real (inflation-adjusted) gross domestic product (GDP) by 0.7 percent and increase the level of employment by 0.9 million in the third quarter of calendar year 2014 (the end of fiscal year 2014) relative to the levels projected under current law, CBO estimates.

A million new American jobs, which at the current rate of employment improvement would take six months to achieve. An almost 1% in GDP improvement in an economy, which some experts believe will only grow 1% under certain circumstances. The CBO forecast, based on an end to spending cuts, says that the national economy would be fundamentally transformed.

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A decision to reinstate previous spending would not be without negative consequences, the CBO predicts. A move from austerity to stimulus has predictable effects, whether it happens in the United States or Europe, according to conventional wisdom. The CBO reports:

Although output would be greater and employment higher in the next few years if the spending reductions under current law were reversed, that policy would lead to greater federal debt, which would eventually reduce the nation’s output and income below what would occur under current law. Moreover, boosting debt above the amounts projected under current law would diminish policymakers’ ability to use tax and spending policies to respond to unexpected future challenges and would increase the risk of a fiscal crisis (in which the government would lose the ability to borrow money at affordable interest rates).

What the CBO does not say is that the result of higher spending may not cause an increase in deficits, if the resulting economic boom is large enough. That is at the core of the violent debate about austerity in Europe. With each passing day, it becomes the foundation of the arguments in America. A better economy means more taxes. That refrain is as old as modern economic theory.

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The debate about the fate of sequestration will not begin until the fall, and perhaps latter if the national debt ceiling is not approached until even later in the year. That is too bad, if the CBO is right. The war over spending for expansion versus saving for lower deficits will be put off for up to another four months. At that point, the CBO forecasts for what might happen in 2014 will be too old to be useful. And the chance to agree with them or challenge them as a means to gamble on how to improve the economy and the government balance sheet will have lapsed to yet another stage, which at the very least means that a problem that needs addressing will go unaddressed.

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